This seems like a pretty easy one. Most people have insurance, and everyone knows, generally, how it works. Right?
Well, yes and no.
In an economic sense, insurance lets us put more of our capital into running our business. Rather than having to set aside a large stash of money for a malpractice suit or a theft, we can pool our risk with others.
It’s unlikely each of us – as an individual business – will have an incident that requires a large amount of cash to recover from. But it is likely that a small number of members in our industry will have such an incident.
So rather than set aside capital for that low, but possible, risk of a theft, I invest in insurance. I pay a small amount every month, hoping I’ll never need to use the insurance. But if I do, the cost of that theft will be covered by the premiums that I – and everyone else who has this insurance – has invested in the insurance.
And – this is where we get to the main benefit of insurance – since I have invested in insurance, I have more money to spend elsewhere in my business. Rather than having to set aside 100% of the money I would need to cover the fallout of a theft, I put 1% of that money into the insurance, and have the other 99% to invest in more useful things, such as staff, training and equipment.
If a typical business had to set aside enough cash to cover the costly, but improbable, things most insurance covers, we would have very few business get past the planning stages.
So now that we know what insurance is and why we have it, let’s look at what is not insurance.
A standout example of what is not insurance is dental insurance. Dental insurance typically covers two things:
- Preventive treatment, such as cleanings, exams and x-rays. These are known, quantifiable and relatively low cost. At the beginning of a year a typical patient can tell you how many cleanings and exams they’ll get in the coming year, and about how much they’ll cost.
- A relatively small amount for unexpected treatment such as a root canal or an implant. But since the cost of the expected treatment is high relative to the portion paid for by the insurance, the insurance isn’t really doing much to minimize a patient’s financial risk. Plus, a lot of what dental “insurance” (yes, it’s time to start putting it in quotes) covers is fairly predictable for a patient over time. Most patients will need a few fillings here and there – not really something to insure against, since it’s expected and known.
You can insure against all sorts of unexpected events – from a flat tire to an alien abduction. And insurance can often be a very good investment and smart use of money. But, as with anything, it’s important to make sure the policy coverage matches the risks you are insuring against.